On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law. The Tax Cuts and Jobs Act of 2017 (TCJA) made small reductions to income tax rates for most individual tax brackets and significantly reduced the income tax rate for corporations. It also provides a large new tax deduction for owners of pass-through entities and significantly increases individual alternative minimum tax (AMT) and estate tax exemptions. And it makes major changes related to the taxation of foreign income.
In February 2018, the IRS published the new online W-4 Calculator, and it is strongly recommended that employees access the calculator to determine the correct number of withholding allowances.
- The IRS calculator will ask a series of questions about income, marital status, anticipated deductions and eligibility for tax credits, to estimate annual taxable income and suggest the most appropriate number of withholding allowances.
- It is recommended that all employers should begin considering reminding employees of the withholding calculator, which will help employees check their tax withholding at any point in the year, compared to their total expected full-year tax liability.
On June 6th 2018, the IRS released a draft of the 2019 Form W-4 and instructions, some highlights include:
- Employees are strongly encouraged, but not required, to complete a new W-4 for 2019.
- Employers will still be able to use 2018 and prior Forms W-4 for employees that don’t complete a 2019 W-4. As a result, payroll systems will need to maintain both 2018 and 2019 withholding systems and calculations simultaneously.
- Number of allowances Eliminated: Line 5 “Total number of allowances you’re claiming,” is eliminated.
- New Marital Status Box – Head of Household: A third IRS withholding calculation/table will need to be added to correspond with this new marital status, in addition to the existing table for Single and Married Filing Jointly.
- New Line 5 – Additions to Income: This new line asks employees to enter nonwage income [not subject] to withholding (such as interest of dividends).
- Previously, employees with significant nonwage income had to convert such amounts to equivalent per-payroll additional amounts to withhold.
- Line 5 amounts will be full-year estimates, so employer payroll systems will need to be modified to include these full-year amounts in withholding calculations.
- New Line 6 – Itemized and Other Deductions: Line 6 prompts employees to enter estimated subtractions to include based on expected deductions (such as state and local taxes, mortgage interest, and charitable contributions).
- Previously, employees needed to convert deductions into equivalent withholding allowances.
- Again, amounts entered will be full-year estimated deduction totals, so payroll systems will need to include full-year amounts in withholding calculations.
- New Line 7 – Tax Credits: This line asks employees to enter the full-year amount of any tax credits for which they expect to qualify, such as the child tax credit. As a reminder, the 2017 Tax Cuts and Jobs Act significantly expanded child and dependent tax credits.
- Previously all tax credits were translated by employees into additional withholding allowances. With the 2019 Form W-4, full-year tax credit amounts will be directly entered into payroll systems.
- Any tax credits should only be entered for the highest paying job in the households with multiple incomes. Taxes may be significantly under-withheld for a household if both spouses enter the full-year credit expected, resulting in a large tax amount due at year-end. Conversely, taxes may be significantly over-withheld if neither spouse enters the total tax credit amount, resulting in reduced net paychecks during the year, and a lard tax refund at year-end.
- New Line 8 – Additional Household Income Due to Multiple Jobs: If applicable, employees will enter the [full year] income associated with any second job. Additional wage income should only be entered for the highest paying job in households with multiple incomes. There are special instructions for households with more than two incomes.
- Employers will include these full-year amounts in withholding calculations in order to determine the appropriate tax bracket and rates for the employee.
- Alternatively, the instructions will offer a calculation to estimate an additional tax amount to withhold per pay period, which was the solution prior to 2019.
- Previously, employees used a Form W-4 worksheet to calculate a specific additional amount to withhold per pay period.
- Employees will be able to utilize the online calculator.
- Line 9 – Additional Amount, If Any, You Want Withheld From Paycheck: This line is unchanged.
As more information is released we will continue to communicate changes and what you should look for. Please contact your Payroll Specialist if you have any questions.